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Chapter One

Trademark Counterfeiting

Trademark counterfeiting? Most people have never heard of the term, although they may be familiar with names such as imitation, knockoff, replica, look-alike, counterfeit, and fake.

    Under the English common law, trademark counterfeiting was called palming off. What the counterfeiter does is to "palm off" a counterfeit product as the genuine product by a ruse as to source of origin. The counterfeiter usurps the goodwill and brand-name recognition inherent in a trademark by attaching a counterfeit trademark to his product. "Palming off" is often used to refer to trademark counterfeiting to this day. Illegal actions may also include the counterfeiting of the packaging, referred to as the trade dress. In France, the term "contrefaçon" refers to any form of intellectual property infringement, while the term "piraterie" is closer to the English meaning of counterfeiting. The term "l'imitation illicite" refers to the creation of an approximate copy of another's mark. In Germany, the expressions "markenpiraterie" and "produktpiraterie" encompass both the meaning of the English word counterfeiting and infringement.

    Trademark counterfeiting is not to be confused with the counterfeiting of money, nor with industrial piracy, which involves the theft of trade secrets. Trademark counterfeiting refers to the unauthorized reproduction or counterfeiting of trademarks, while the terms product or commercial counterfeiting are broader and include the counterfeiting or piracy of intellectual property. Although intellectual propertyrights include several types of protection such as patents, copyrights, trademarks, trade secrets, design protection, plant variety protection, and others, commercial counterfeiting primarily involves patents, copyrights, and trademarks.

    Product counterfeiting has a long history, but since the 1970s losses have escalated alarmingly. President Clinton threatened to impose $1.8 billion in trade sanctions in 1995 and $2 billion in trade sanctions in 1996 against the People's Republic of China for the pirating of American-made products—notably recorded music and computer software. Only the signing of an agreement in both years prevented an all-out trade war.

    The trade dispute with China focused international attention on what had become an epidemic in commercial counterfeiting. Long considered a crime involving only the counterfeiting of jeans and watches, the list of products expanded to also include heart pumps, automobile and airplane parts, prescription pills, and countless other products.

    In addition to palming off, commercial counterfeiting may involve illegal duplication and actual theft; these primarily involve products protected by copyright and by patent.

    Although all counterfeiting involves duplication to some degree, illegal duplication is largely a problem caused by technological invention and for the most part involves only copyrights. Under copyright law, the copyright owner has the exclusive right to distribute his creative works. The unauthorized duplication and distribution of another's creative work in the absence of a licensing agreement or other authorization is illegal.

    The earliest form of illegal duplication involved book piracy. Prior to the invention of the printing press, book piracy was impossible. Books were reproduced by hand, and it took years to produce a copy. With the invention of the printing press in the late 1400s, the need for a copyright—or right to produce copies—became necessary. In modern times, high-speed duplicators have made music, computer software, and motion picture piracy an inexpensive and lucrative, illegal business venture.

    A notable copyright pirate was Isaac Zafrani, who set up an international organization selling pirated motion picture video cassettes in 1979. Zafrani's main business expense was the purchase price of fifty high-speed video cassette duplicators. Operating out of Panama, Zafrani set up the duplicators in the "slave" position, so that the machines worked nonstop duplicating copies of American-made videos. Zafrani's illegal enterprise was engaging in back-to-back video copying, which is the most prevalent type of video cassette piracy. In the United States, an estimated 10 percent of the nation's 25,000 to 30,000 video retail outlets deal in pirated video cassettes.

    Zafrani hired traveling salesmen to sell the illegal copies in the remote villages of South America. Zafrani's operation sold in bulk to freighters passing through the Panama Canal. Before he was apprehended, business had become so lucrative that Zafrani had opened up a European office.

    Actual theft involves copyrighted works and patented inventions. Despite their intangible nature, they can be stolen in their entirety. Simply put: when a pirate steals a sound recording, a computer program, or the chemical composition of a pharmaceutical—he has stolen the product. The pirated product may or may not have the quality of the legitimate product—but the inventiveness, the creativity, and the research costs that make the product unique have been stolen. The loss is much greater than the loss involving trademarks: when a counterfeiter attaches a counterfeit mark to a product, the theft is limited to the goodwill and brand recognition.

    Technological advances have made actual theft the fastest-growing type of commercial counterfeiting. With the advent of digital technology, pirates can make actual copies of computer software, recorded music, and motion pictures with no loss of quality in successive generations of copies.

    In the latter half of the twentieth century, copyrights are suffering the greatest losses, in part because of the many new products that have been invented, such as the analog cassette, video cassette, compact disc (CD), and many other products, and because of advances in the means of distribution. Although trademark counterfeiting was widespread in China throughout the 1990s, the trade dispute that was investigated by the U.S. Trade Representative (USTR) in 1994-1996 involved works protected by copyright: sound recordings, computer software, and motion pictures.

    The distribution of works protected by copyright has been revolutionized by the invention of cable television, which involves satellite transmission, and by the Internet, which can involve the digital transmission of copyrighted works such as computer programs, video games, and sound recordings. Previously, the piracy of copyrighted works required the possession of a legitimate product in a fixed or tangible form (i.e., a book or a music cassette), but these technological advances in the commercial distribution of copyrighted works have offered new avenues for product piracy in intangible form (i.e., cable programming).

    Cable piracy, also called signal theft, involves the actual theft of copyrighted material. The birth of the cable industry is attributed to Jerry Levin, who reinvented the cable television industry when he proposed that the service be distributed by satellite. Satellite transmission of cable programming transformed Time Warner's Home Box Office (HBO) into a cable giant. The cable pirate, who hooks up illegally, is stealing television programming, which is protected by copyright. In the United States, an estimated one in four cable viewers does so illegally; the problem is worse outside the United States, where entire countries engage in signal theft.

    The ultimate triumph of digital technology is the Internet, where everyone is connected to a cyber universe by computer, modem, and telephone line. In the twenty-first century, electronic commerce by way of the Internet is expected to reinvent the way people purchase products. The Internet offers perhaps the ultimate avenue for a counterfeiter, who can e-mail a pirated computer program or music recording anywhere in the world, and keep his identity a secret.

THE IMPORTANCE OF INTELLECTUAL PROPERTY

    No matter how vast a company's portfolio of physical and financial assets, its portfolio of intangible assets known as brands is even more valuable. Indeed, the goodwill, brand-name recognition, and quality associated with the trademark Quaker Oats [R] are as important as the product itself. John Stuart, former chairman of Quaker Oats, once said, "If this business were to be split up, I would be glad to take the brands, trademarks, and goodwill and you could have all the bricks and mortars—and I would fare better than you."

    Because of their intangible nature, placing a monetary value on intellectual property did not occur until modern times. Reckitt and Colman, the food conglomerate, was the first to put a value on its trademarks in 1985. Other corporations followed. Today, every major corporation places a monetary value on its brands, which, like other property, can be bought and sold.

    Since the mid-1970s, the biggest development in the U.S. business landscape has been the change from a manufacturing economy to a service economy. This change has made intellectual property the most valuable commodity of the U.S. economy.

    "Intellectual property [IP] is the seed of economic prosperity," says Professor James P. Chandler, president of the National Intellectual Property Law Institute. "Look around you—a chair, a car, these are physical products that are grounded in IP law."

    According to Professor Chandler, American-made intellectual property constitutes 80 percent of all intellectual property in the world. He cites a study completed by former Vice President Dan Quayle, who chaired an economic council for President Bush. In the study, the volume of American intellectual property was compared to the volume produced by the rest of the world. Quayle's study group found that the United States produced more IP than the rest of the world combined and ten times more IP than any other single country.

    Today, most countries recognize that trade in intellectual property is the foundation of a country's wealth. Previously, world commerce dealt only with trade in goods, not intellectual property. Strong IP protection is very important in the global economy chain, where goods are manufactured in many countries (see Figure 1.1).

    "Intellectual property is to the twentieth century what coal was to the nineteenth century," says John Bliss, president of the International AntiCounterfeiting Coalition (IACC), a trade group based in Washington, D.C. "IP has become like a natural resource. It is every bit as valuable, if not more valuable, than personal property."

    The chief threat to the U.S. economy is the counterfeiting of its intellectual property. Before continuing with the discussion of product counterfeiting, copyrights, trademarks, and patents will be defined, and a short review of the major laws governing all three will be presented.

Trademarks [U.S. Code, Title 15, Chapter 22]: A word, design, symbol, device, or combination used by a manufacturer or merchant to identify his goods and distinguish them from others. Trademarks include brand names identifying goods, service marks identifying services, certification marks identifying goods or services meeting certain standards, and collective marks identifying goods, services, or members of a collective organization.

Copyrights [U.S. Code, Title 17]: An original work of authorship that meets the criteria of originality, tangible form, and fixation. A copyright goes to the form of expression, rather than to the subject matter of the writing. Works of authorship includes literary works; musical works, including any accompanying words; dramatic works, including any accompanying music; pantomimes and choreographic works; pictorial, graphic, and sculptural works; motion pictures and other audiovisual works; sound records; and computer programs.

Patents [U.S. Code, Title 35]: A grant of a property right by the government to the inventor of an original invention that meets the criteria of novelty, unobviousness, and utility. Three types of patents are recognized: utility patent, design patent, and plant patent. Countries differed as to whether a patent is awarded to the inventor who is the first-to-file or the first-to-invent, but under the Trade Related Aspects of Intellectual Property Rights (TRIPS) of the General Agreement on Tariffs and Trade (GATT), patent offices are required to award patents on a first-to-file basis. In the United States the right conferred by the patent grant extends throughout the United States and its territories and possessions, and it is a "right to exclude others from making, using, or selling" the invention.

Trademark Act of 1946 (Lanham Act)

    In passing the Lanham Act (the Act), Congress recognized the extended use of trademarks and decided "public policy requires [they] receive nationally the greatest protection that can be given them." Although trademarks need not be federally registered to be protected, the Act entitles trademark owners to register their marks in the U.S. Patent and Trademark Office (USPTO), if goods bearing the mark have been shipped in interstate or foreign commerce, or if services under the mark are either subject to federal regulation or have been rendered in more than one state.

    Federal registration offers substantial advantages: (1) it serves as notice nationwide of the registrant's ownership claim in the mark; (2) it serves as evidence of the registrant's exclusive ownership rights in the mark (shifting the burden of proving otherwise to anyone challenging those rights); (3) it gives federal courts jurisdiction to hear infringement claims, counterfeiting claims, and related state unfair competition claims; (4) it precludes states from requiring modifications in the display of the registered mark; (5) it can be used as a basis for trademark registration in some foreign countries; and (6) it can be recorded with the U S. Customs Service to prevent importation of infringing foreign goods.

    Eligibility and Procedure

    Certain aspects of a trademark may prevent its being eligible for registration. For example, the mark may be descriptive, or include immoral, deceptive, or scandalous matter, or matter that disparages or falsely suggests a connection with persons, institutions, beliefs, or national symbols. Further, marks that include flags or other governmental insignia cannot be registered. Also, marks that include names, portraits, or signatures of living individuals will be refused registration without the individual's written consent. Finally, a mark may so resemble a registered mark that registration will be barred. Matters of substance, including whether there is ownership of the mark and use as a mark, may also be the basis for refusal of registration.

    The USPTO examines all trademark applications. If it determines the trademark is entitled to registration, the mark is published in the USPTO's Official Gazette. Persons believing they will be damaged by the registration may file an opposition with the USPTO within thirty days of publication.

    If all requirements are met and no problems arise, a certificate of registration is issued. At this point, one of the following trademark registration notices may be used (usually near the right shoulder of the mark) to notify the public that the mark is registered: "Registered U.S. Patent and Trademark Office," "Reg. U.S. Pat. & Tm. Off," or the letter R enclosed within a circle. Notice is not mandatory; however, profits and damages cannot be recovered under federal law unless it is used or the infringer actually knew of the registration. Use of a trademark registration notice before the mark is registered is inappropriate and may prevent the owner from obtaining relief against an infringer. The informal symbols TM (for trademark) or SM (for service mark) may be used with unregistered marks to indicate a claim of common law trademark fights.

    Remedies against Infringement and Counterfeiting

    Trademark infringement exists when any person, without the consent of the trademark registrant/owner, uses the same or a confusingly similar mark, on the same or closely related goods or services, in the same geographical area or, in some cases, within a natural area of expansion.

    Registrants/owners may bring a civil action against infringers. The remedies available (under federal law and most state laws) are: (a) an injunction against future infringement; (b) the infringer's profits; (c) damages for past infringement (which may be trebled under federal law); (d) destruction of all materials bearing the infringing mark; and (e) court costs and, in exceptional cases, reasonable attorney's fees.

    Criminal penalties and stiffer civil remedies are available under federal law (and some state laws) for intentionally dealing in goods or services knowingly using a counterfeit mark. Federal criminal penalties include: (a) fines for individuals up to $2,000,000 ($5,000,000 for subsequent offenses), or imprisonment not exceeding ten years (twenty years for subsequent offenses), or both; and fines for corporations or partnerships up to $5,000,000 ($15,000,000 for subsequent offenses); and (b) destruction of articles bearing the counterfeit mark. Federal civil remedies include: (a) seizure, without notice, of the goods, counterfeit marks, means of making the marks, and relevant business records; and (b) mandatory treble damages and attorney's fees (including investigator's fees).

    Continuity of Trademark Rights

    Common law trademark rights continue indefinitely as long as the mark is properly used and not abandoned. To maintain a federal trademark registration, however, a declaration that the mark is still used in interstate or foreign commerce must be filed during the sixth year after registration, and if first registered after November 16, 1989, the registration must be renewed every ten years, or every twenty years, if filed prior to November 16, 1989. A petition to cancel a registration may be filed by anyone who believes he is or will be damaged by the registration. These petitions must generally be filed within five years of the registration. Except under certain circumstances, once a mark has been in continuous use for five consecutive years subsequent to registration (and is still in such use), the right of the registrant to use the registered mark in commerce for the specified goods or services will become incontestable.

    Copyright Act of 1976

    Federal Copyright Protection

    The Copyright Act (the Act) seeks to promote literary and artistic creativity in the United States. To achieve this, the Act grants authors/creators exclusive rights to (1) reproduce their works, (2) distribute the reproductions, (3) display and perform the work publicly, (4) prepare derivative works, and (5) authorize others to do these things.

    To receive copyright protection, the creation must be original, and either a literary, musical, or dramatic work; pantomime or choreographic work; pictorial, graphic, or sculptural work (including the nonutilitarian design features of useful articles); motion picture or other audiovisual work; sound recording; computer program; or compilation or derivation of preexisting works.

    Federal copyright protection automatically begins as soon as a work is created and fixed in tangible form (written down or recorded on tape). Unfixed works (extemporaneous speeches; unrecorded live performances) may be protected by state law since they are not covered by the Act.

    Maintaining Copyright Protection

    Prior to the effective date of the Berne Convention Implementation Act of 1988 (March 1, 1989), work that was publicly distributed must have had a copyright notice affixed to it to prevent loss of federal protection. Copyright notice comprises: (a) the letter "C" enclosed within a circle, the word "Copyright," or the abbreviation "Copr.," (b) the year of first publication, and (c) the name of the copyright owner. Notice may be omitted on certain articles such as jewelry, stationery, and other such works. The notice advises others of the rights claimed. As to the works distributed before March 1, 1989, the omission of or error in the notice will not invalidate the copyright if (a) few copies are involved, (b) the copyright is registered within five years, and reasonable effort is made to add the notice to all publicly distributed works once the omission/error is discovered, or (c) the omission/error violated an express written condition for distribution. Now, notice of copyright is not required; however, omission of notice provides a defendant with additional defenses in an infringement trial.

    There are other requirements under the Act that copyright owners must meet. For instance, there is a deposit requirement, which provides that within three months after a work is published with notice in the United States, two complete copies of the best edition must be deposited in the U.S. Copyright Office. Failure to do so also does not invalidate a copyright; however, if the Register of Copyrights makes a written demand for the deposit, failure to deposit within three months after this demand can result in a fine up to $250, plus the retail price of the work, plus $2,500 if the failure is willful or repeated.

    Federal Registration of Copyrights

    To register copyrights in published or unpublished works, an application, two complete copies of the best edition of the work, and a $20 fee must be filed in the Copyright Office. Although failure to register does not invalidate a copyright, prompt registration is advisable since: (a) it is a prerequisite to suing an infringer; (b) damages and attorneys' fees cannot be recovered for infringements beginning before registration (unless registration occurs within three months after first publication); (c) a certificate of registration issued before or within five years of publication is evidence of a valid copyright; (d) certificates may be recorded with U.S. Customs to prevent importations of infringing works; (e) registration is required to renew copyrights in works published before 1978; and (f) registration preserves the copyright information on the work.

    Works created on or after January 1, 1978 have copyright protection for the author's (or surviving joint author's) lifetime plus 50 years. A "work made for hire," or an anonymous or pseudonymous work is protected for the shorter of 75 years from publication or 100 years from creation.

    For works created before 1978, the period of copyright depends on certain factors. If unpublished and protected by state common law copyright, the work automatically becomes federally protected in 1978, and is guaranteed federal copyright protection for 25 years, plus an additional 25 years if the work is published during the initial 25-year period. (Note: special rules apply to sound recordings created before February 15, 1972.) Works protected by federal copyright before 1978 are protected for 28 years from publication (or from registration if unpublished), with possible renewal for an additional 47 years.

    Copyright Infringement

    Copyright infringement generally occurs when there is unauthorized use or copying of a copyrighted work. Copyright owners must prove that (1) the alleged infringer had access to the work, and (2) there is "substantial similarity" to the owner's work. Such a showing generally shifts to the alleged infringer the burden of showing independent creation.

    There are several limitations on the exclusive rights of a copyright owner. For example, the following activities are not copyright infringements: (1) use of the basic idea expressed in a work; (2) "fair use" of a work (such as use for purposes of criticism, comment, news reporting, teaching, scholarship, or research); (3) independent creation of an identical work; (4) sale or limited public display of a lawfully made copy or phonorecord of a work by the owner of the copy or phonorecord; (5) use under one of the four compulsory licenses; (6) importation of specified quantities of copies by an importer for private use; and (7) copying or adapting a computer program as an essential step in utilizing it in conjunction with a machine or for archival purposes. These are only some activities that are not copyright infringements.

    Remedies for Copyright Infringement

    Copyright infringement that is willful and for profit is a federal crime for which a court is required to order: (1) a fine of not more than $100,000, or imprisonment not exceeding one year, or both (penalties are generally much greater for reproducing or distributing infringing phonorecords of sound recordings or copies of motion pictures [or other audiovisual works], depending on the number of copies, the period of infringement, and the number of offenses); and (2) seizure, forfeiture, and destruction of all infringing reproductions and all equipment used in their manufacture.

    There are also civil remedies for private parties (including the holders of any exclusive rights in copyrighted works). They include (1) injunctions against future infringements; (2) impounding and destruction of all infringing copies and articles used to make them; (3) actual damages suffered by the copyright owner; (4) any additional profits of the infringer; (5) instead of actual damages and profits and at the copyright owner's election, statutory damages for all infringements beginning from $500 to $20,000 (subject to reduction or increase); and (6) court costs and a reasonable attorney's fee.

    Criminal Penalties

    Under the 1976 Act computer piracy—no matter how egregious—was never more than a misdemeanor copyright violation. At that time, the computer software industry was in its infancy. By 1989, the computer software industry estimated that illegal copying amounted to an industry loss of $1.6 billion. In 1992, the 1976 Act was amended to provide harsher criminal penalties. Originally introduced to deal with the growing problem of computer piracy, the statute was broadened to include all works protected by copyright. Under the new provisions, an infringement becomes a felony based on a combination of the number of infringing copies or phonorecords made or distributed, and their retail value. The penalty is up to five years' imprisonment, or a fine, or both, if the offense consists of the reproduction or distribution of at least ten copies or phonorecords of one or more copyrighted works, with a retail value of more than $2,500, during a 180-day period. A second or subsequent offense can result in imprisonment of up to ten years.

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